Most people cannot make provision for the future

Cameron’s  Big Society is predicated on the idea that people are generally able to provide for  themselves.  This is clearly not the case in vital  areas such as healthcare, education and pensions, not least because most people do not earn enough to pay for such things for themselves and their dependants.  Nor, particularly in the case of saving for old age, is it reasonable to expect most people to do so wisely even if they can afford to invest.

To expect the vast majority of human beings to be expert enough in financial matters to make wise private investment decisions is absurd,as absurd as expecting every man to be his own lawyer. Therefore, all but a few of us will turn to supposedly expert advisors for advice. The problem with such people is twofold: they often have a vested interest  in selling or promoting a particular product and even when they do not, they are frequently bad judges of the financial future. (If investing was easy and certain for the so-called experts, all financial institutions would be permanently hugely successful).

When someone sells you a private pension plan or insurance, he does not do it out of the goodness of his heart. He does it because he earns a commission or fee from it. As the pensions mis-selling scandal of the Thatcher years showed, that incentive drives many, probably most, financial service consultants to sell the product most beneficial to their income rather than to the customer.

The customer can also get misled if he takes reputedly independent advice, whether this be from a self-described independent financial adviser or out of the financial pages of newspapers and magazines or investment newsletters. The advice given may be anything but independent. Unbeknown to the client, an advisor may get a commission for recommending an investment and media share tipsters often have no scruples about recommending shares which they know to be poor performers, either because of direct inducements from the companies or because they work for a company which gets business from the sharetipped. Share tipsters can also make a profit by “ramping up” a price in shares they hold by recommending it or depress a share by criticising it and then buying at the depressed price.

Those recommending shares or financial products are in a wonderful position: they can tip to their heart’s content without taking any responsibility for their tips. No tipster has a consistent record of predicting successful investments. Quite a few have utterly dismal records over years. Indeed, so poor is their general performance that one might ask whether it is any worse than randomly selecting investments. It may even be worse. As Woody Allen once remarked, “A stockbroker is someone who invests your money until it is gone”.

The Daily Telegraph put the matter of share tipping to a sort of test in 2001. It employed a professional tipster, an astrologer and a four year old child to notionally invest £5000 in the stock market. The professional tipster applied his supposed expertise. The astrologer selected her shares using her star charts. The four year old child chose by repeatedly tossing (at the same time) a number of pieces of

paper in the air with the names of shares written on them. At each toss she caught one. After a year all the investments had lost money, but the four-year-old-child lost least, followed by the astrologer with the supposed financial expert bringing up the rear quite some way behind.

A rational examination of the actual performance of tipsters and advisors could only lead to the conclusion that predicting the future economy is a mug’s game. Why would an expert do worse than a four-year-old child and an astrologer? Well, it could have been a fluke, but an unlikely one as both the child and the astrologer did better. More probably the financial advisor’s knowledge is a positive hindrance. A parallel is with the football pools. Many people have a very considerable knowledge of the form and general state of professional football clubs. Yet these people do not appear to be any better at predicting results than the punter who knows nothing about football and does the pools by putting a pin in the matches or has fixed numbers.

The truth is that no one can guarantee investment for a secure future or even come anywhere near to it. All calls for private provision replacing public in whole or part should be placed in that context.  Not only that but account has to be taken of the great variety of abilities found in a population.   IQ is distributed so that around ten per cent of the British population have IQs of 80 or less.  An IQ of 80 is the level which most psychologists working in the field of intelligence testing judge that a person will struggle to live an independent life in a sophisticated modern society.  Add in the differences in education, social status and wealth and the idea that most people can make their own provision for a pension becomes unreasonable. Take into account the high cost of living, especially the ever rising cost of housing and raising children, and falling pay and  it becomes farcical. 

As for the broader  idea that  individuals should, if they have the means,   pay for their healthcare, education and   insurance to cover periods when they are not working,  to expect all but a small part of the population to do is clearly nonsense when the average annual pre-tax UK  income is around £26,000 with many earning below £15,000.

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  • John Booth  On April 17, 2011 at 2:27 am

    I do not believe Cameron’s Big Society is predicated on the idea that people are “generally” able to provide for themselves. It certainly assumes that people can do more for themselves and for others rather than depend on the state for everything.

    In the case of healthcare, education and pensions, it is not a question of everyone having to make private provision for the totality of these services. No doubt most could contribute more if they wished but it would mean spending less on other things such as foreign holidays, alcohol, electronic gadgets, etc.. There are some who have made exactly those decisions to afford private education for their children.

    For the last ten years, the UK Government has been living beyond its means. It has borrowed heavily (and is still borrowing despite the threat of cuts) to build hospitals and schools, and to pay public servants inflated salaries and pensions. The truth is that this level of expenditure is unsustainable.

    We are more dependent on importing natural resources than most advanced nations and are now facing fierce competition for those resources from developing economies. To buy those resources at prices that are being driven by increasing demand, we have to increase our exports at a time when we have lost much of our competitive advantage to low cost manufacturers in the developing world.

    The truth is that most of us will have to work harder and more efficiently just to stand still. Taxes and benefits will have to be structured to reward those who do, not those who expect the state to provide everything.

  • John Booth  On April 17, 2011 at 2:33 pm

    Despite the borrowed billions spent by the last Government on education, it failed to equip a growing underclass with the skills and ambition to grasp the opportunities during the boom years. Instead, it took the easy path of supporting them on benefits (partly funded by borrowing) while allowing mass immigration from places like Eastern Europe, the Indian subcontinent and Africa to provide the workers to support the boom. Most of the new jobs, skilled and unskilled, that were created in those years went to immigrants. We were not only borrowing money from other countries, we were borrowing their workers.

    Not only did education policy fail the less academic, it also failed many of those who should have progressed to highly skilled jobs in fields such as engineering, business, medicine, etc.. By setting targets for schools, many pupils were encouraged to take easier subjects that would preclude entry to the more challenging disciplines at university. Finally, to meet the target of 50% going to university, universities were given financial encouragement to create courses for those who could not meet the demands of the harder disciplines. It is no wonder that industry has fought so hard to block restrictions on immigration.

    Mass immigration has put a severe strain on service providers, such as local government, schools, the NHS, the Police and the courts. Not only do they need to provide for the increased numbers but also translators or tuition for those who do not speak adequate English. Ironically, the costs associated with this have been mitigated by employing immigrant staff.

    Immigration has also vastly increased the demand for new housing, pushing up the price of land for development, which is reflected in house prices and rents, and requiring new roads, schools and hospitals to be built, no doubt requiring many more immigrants to work on these projects.

    If there is anything farcical in all this, it is that we voted in the Government that embarked on these policies, not just once, but three times.

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